Though delayed monsoon and sowing has hurt the Indian agri sector, Insecticides India was able to report 12.4% growth, YoY. Maharatna product revenues were flat but other products reported healthy growth. EBITDA margin expansion continued even in Q1FY20 with 20bps improvement, YoY. The company has raised its EBITDA margin for the 13th consecutive quarter, YoY. We remain positive on Insecticides due to
1) steady launches of high-margin products,
2) removal of generic products from the portfolio and
3) backward integration of technical.
The stock is trading close to 1-year forward ‘mean P/E - 1SD’. Return ratios, too, are above the cost of capital; hence, we believe the risk:reward is favourable to investors. Maintain BUY with a DCF-based target price of Rs821 (12x FY21E EPS).
* Delayed monsoon impacted revenue growth: Despite 15-20 days delay in monsoon and sowing, Insecticides reported 12.4% revenue growth YoY. Considering difficult macros in Agri sector, we believe it is commendable performance. Maharatna sales were flat YoY. B2C, B2B and export sales breakup was 26%, 72% and 2%, respectively, in Q1FY20. Revenue breakup of insecticide, herbicide, fungicide and PGR was 49%, 44%, 4% and 3%, respectively, in Q1FY20.
* Higher EBITDA margin: EBITDA margin expanded 20bps, YoY, due to better revenue mix. We note the margin has expanded for the 13th consecutive quarter, YoY. We expect, with changing revenue mix, the EBITDA margin to expand to 16% in FY21E from 15.6% in FY19.
* New product launches to continue: Company has reiterated its strategy to focus on high-margin products in FY20-FY21. It has introduced three new products in Q1FY20 and one product in July 2019. Out of these products, one product was herbicide, one insecticide and two fungicides. The company plans to introduce 2-3 products in Aug-Sept 2019. It has also received patent for its Maharatna product Aikido. We believe rising revenue share of Aikido will lead to better margins in FY21.
* Guidance for FY20: Insecticides India has guided for 10% revenue growth in FY20 and expects EBITDA margin to expand by 150bps. It expects effective tax rate of 30% in FY20. Maharatna products revenue growth is expected to be ~20% in FY20.
* Maintain BUY: We expect Insecticides India to report revenue and PAT CAGRs of 11% and 13.1%, respectively, over FY19-FY21E. Return ratios are expected to remain above the cost of capital over the same timeframe. We reiterate our BUY rating on the stock with a DCF-based target price of Rs821 (implied target P/E of 12x FY21E EPS). The stock is trading close to its 1-year forward ‘mean P/E - 1SD’.
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